Infrastructure: Local funding for growth (NZ Herald)
Are restrictions on local government funding mechanisms stifling the ability of our cities to grow at their best?
When running for mayoralty in 2016, Phil Goff made the following commitment on rates:
“Rate rises will be kept low and affordable at an average of 2.5 per cent per annum or less, if current council fiscal projections are correct and the consumer price index stays low.”
The question of how much rates will rise — and the commitment to keep them as low as possible — are cornerstones of any recent Auckland mayoral bid. But there are concerns the current restrictions on local government’s funding mechanisms are stifling the ability of our cities to grow at their best.
Reliance on revenue from rates
In New Zealand, council revenue is largely separated from economic performance.
Local government is the core funder of transport and water services for new development, yet its revenue is derived from property rates — which are a cost allocation method linked to council costs, and not to the success of the economy or land prices.
Conversely, central government is the direct benefactor of growth: receiving increased GST, income tax and corporate tax when the economy grows.
Increased council costs mean an increase in rates, irrespective of economic performance, and any efforts made to charge ratepayers more to deliver additional services — including for those without homes who pay no rates — is consistently met with strong opposition from homeowners.
Councils see little funding benefit from growth, and as a result tend to have a culture of cost minimisation, heavily influencing their decision making at the expense of value creation.
“Importantly, from a local government economic development perspective, property taxes are not the best incentive to encourage councils to invest in infrastructure,” says Local Government Funding Agency chair Craig Stobo.
“If council revenue streams were tied to their performance, successful councils would accrue more revenue, providing more choices for their communities.”
This is not a new concern: a 2015 review into local government funding by Local Government New Zealand (LGNZ) found that the heavy reliance on property taxes to fund local services and infrastructure fails to incentivise councils to invest for growth.
The only other major source of revenue local government currently has in its toolkit is to lobby central government: Shane Jones’ Provincial Growth Fund will see an investment boost in regional New Zealand, and the Housing Infrastructure Fund is aiding high growth councils to advance infrastructure projects that will help increase housing supply.
Yet the patience required for central government to fill the funding gap has seen growth issues turn chronic. Infrastructure New Zealand is concerned that private capital which could have filled the gap has been left searching for opportunities overseas.
Funding and finance inquiry
Local Government Minister Nanaia Mahuta acknowledges the funding challenges faced by local government and the constraints of rate rises, noting they are rising faster than incomes and cannot be the only solution. She says that — if not met — the funding gap will have consequences for local communities and for the entire country.
“Local government is facing increasing costs for things like three waters, roading, housing, and tourism infrastructure as well as adapting to climate change,” she says.
And some of the councils facing the biggest cost increases also have shrinking rating bases.”
Last month the Minister of Finance, Grant Robertson, asked the Productivity Commission to conduct an inquiry into how to fund and finance local government.
The inquiry will investigate:
- Cost and price escalation for services and investment, including whether this is a result of policy and/or regulatory settings
- Current frameworks for capital expenditure decision making, including cost-benefit analysis, incentives and oversight of decision making
- The ability of the current funding and financing model to deliver on community expectations and local authority obligations, now and into the future
- Rates affordability now and into the future
- Options for new funding and financing tools to serve demand for investment and service
- Constitutional and regulatory issues that may underpin new project financing entities with broader funding powers, and
- Whether changes are needed to regulatory arrangements overseeing local authority funding and financing.
Stobo says the terms of reference given to the Commission by Robertson are very good, and the requirement to consult with the sector is a helpful recognition of the expertise the sector can bring to the table.
“Prospectively this could lead to some devolution of tax setting and collection powers to local government, and a cessation of inefficient quota handouts from central government.
“The final results need to improve the incentives for councils to responsibly invest in local growth,” he says.
The New Zealand Initiative’s executive director, Dr Oliver Hartwich, is confident the Productivity Commission will produce good results.
“What is important for the Productivity Commission’s inquiry is to consider the incentives under which local government operates, and the Terms of Reference certainly allow that,” he says. “More specifically, it will allow the commission to consider the OECD’s recommendation to the New Zealand government that councils should participate in tax revenue increases resulting from economic growth.”
The commission’s final report is expected to be presented by November 2019.
Calling for localism
Coinciding with the announcement of an inquiry, LGNZ and The New Zealand Initiative launched their Localism project, calling for a shift in the way public decisions are made in New Zealand by seeking a commitment to localism. LGNZ President and Dunedin Mayor David Cull says it is important the new funding options incentivise growth.
“[The Localism Project] will highlight how the right incentives and funding can build strong local economies and vibrant communities. The urgent need to properly empower councils is reinforced by the fact that decentralised countries tend to have higher levels of prosperity than centralised ones.
“New Zealand is among the most centralised countries in the world.
“We should not expect central government in Wellington to be the best decision-maker for every local problem. Communities often know best what they need.”
The New Zealand Initiative’s Hartwich adds: “After more than a century of centralism, New Zealand needs to go local.
“Councils and communities must be able to make their own decisions about their future.”
A final report and publication of the Localism Proposal is expected in early 2020, and Hartwich notes there will be ample opportunity for the Localism report and the Productivity Commission inquiry to cross-fertilise.
Taking lessons from America
The city of Houston uses sales taxes to fund general activities.
Earlier this year, Infrastructure New Zealand led a delegation of NZ representatives to Portland, Denver, Dallas-Fort Worth, and Houston — four US cities that are growing more affordably than Auckland — to consider how they are doing what they are doing, and what New Zealand can learn from them.
The report, Enabling City Growth: Lessons from the USA, provides detail on the lessons learnt from the visit, including the following on how local authorities are funded:
- US cities have a number of funding mechanisms that are tied to their economic performance. Denver, Dallas, and Houston use sales taxes to fund general activities, and each has levied a 1 per cent sales tax to deliver improved public transport.
- Dallas and Houston have property taxes with a strong link to property value. In each case, the revenue of the city and its component institutions increases with the success of the city in growing the economy and delivering homes.
- Portland, the city with the greatest growth challenges, also has the fewest incentives to grow. There is no sales tax in Oregon, removing this option also for Portland.
- Instead, Oregon relies on comparatively high income and corporate taxes, but has not extended the ability for Portland to levy these direct.
- Property taxes in Portland have been tied to inflation since the early 1990s. Thus, property values have now become detached from property rates and the two are only reviewed when properties are significantly changed or redeveloped.
Infrastructure: Proposals that hold water (NZ Herald)
Suggestions for reform could impact on local councils, reports Tim McCready.
Figures released last month in a Ministry of Health report show one in five New Zealanders are drinking water from water supplies that don’t meet current drinking water standards.
The report shows larger suppliers — including Auckland’s Watercare, Wellington Water, and Dunedin — are meeting compliance standards throughout the year. But many smaller communities are failing to comply, including some of New Zealand’s most iconic tourism destinations: Coromandel, Whangamata, Waitomo Caves, Tekapo and Milford Sound.
In the 2016 outbreak of gastroenteritis in Havelock North, an estimated 5500 of the town’s 14,000 residents became ill with campylobacteriosis and 45 were hospitalised. It was ultimately traced to contamination of drinking water supplied by two bores — with sheep faeces being the likely source of the pathogen.
The Havelock North incident raised serious questions about the safety and security of New Zealand’s drinking water, and sparked a Government Inquiry into the outbreak.
The inquiry made 51 recommendations to improve drinking water safety — including that all water supplies should be treated, and that a dedicated drinking water regulator should be established.
Speaking at the Local Government New Zealand annual conference last month, Minister for Local Government Nanaia Mahuta said:
“The findings of the Havelock North Inquiry have been a sobering reminder of how, for the sake of our communities, we must make sure that drinking water services are high quality and safe. Too many areas across the country do not meet drinking water standards; in smaller areas, the level of compliance drops to less than 50 per cent.”
A shift to dedicated providers
Stage two of the Three Waters Review was launched in March, and is considering how to improve the management of drinking water, stormwater and wastewater.
New Zealand’s three water infrastructure and services are primarily owned and delivered by the 67 territorial (district and city councils) and unitary authorities, or council-owned and controlled water organisations (in the case of Watercare and Wellington Water).
Accountability for overall service performance is through the local government election process. In theory, if the public is unhappy with the performance of their council they will elect new councillors. But in reality, most members of the public do not have the information, capability, or desire to effectively monitor service outcomes. In many cases — including Havelock North — it is not until things go wrong that the public find out the extent of the problem.
The Havelock North inquiry recommended moving to a system of aggregated, dedicated water providers. A Three Waters public discussion document released by Internal Affairs asks what the options for a new model might look like:
- Regional, publicly-owned water providers?
- A small number of cross-regional, publicly-owned providers?
- Something else?
Infrastructure New Zealand chief executive Stephen Selwood says scale really matters in the water business, because as well as enabling economies of scale, it provides the revenue base to maximise skills capability and capacity to govern, fund, oversee and operate water service delivery effectively.
“The value of scale and capability is already being clearly demonstrated by Watercare and Wellington Water who have between successfully implemented significant improvements in services in their regions that were not previously possible under local council management,” he says. “I favour a small number of providers, from one to to five. One provider like Scottish Water with independent regulation has proven very successful. With one provider you would look to benchmark performance with international comparators like the Australian states. Between three and five providers provides the opportunity to benchmark across NZ companies as well.”
Mahuta, who recently returned from a research trip to Scotland and Ireland to consider the models used there, says there are no pre-determined solutions, but a bottom line is continued public ownership of existing three waters infrastructure.
“Any option must ensure continued public ownership of existing infrastructure assets and we must provide the protections of that assurance through governance and ownership arrangements, at law and ministerial oversight,” she says.
Mahuta says it is critical the Government works closely with councils, iwi, and stakeholders with an interest in three waters services to develop options and recommendations.
How the overhaul will be paid for remains unclear, and Mahuta has acknowledged funding challenges: “Climate and population change alone mean that, even if we address the challenges in front of us now, significant funding pressures will continue to arise for decades to come.” Selwood says it should pay for itself, citing Scottish Water as an example:
“This publicly-owned national water service provider delivers drinking and wastewater services to five million people across an urban and rural hinterland comparable to NZ.
Since formation in 2002, Scottish Water has delivered substantial improvement in water quality, environmental performance and customer satisfaction, while reducing operating costs by 40 per cent and capital costs by 20 per cent on an enlarged capital investment programme.”
One of the main challenges with reform of the water sector will be the impact on local councils. For smaller councils, water is a significant component of their responsibilities.
Removing these raises questions about future viability.
Says Selwood: “I think this provides an opportunity to refocus councils from managing utilities and engineering challenges to being more focused on their communities, their people and giving true meaning to local engagement and participation by people in local affairs.”
Sector deficiencies
Successive reports over the past two decades undertaken by a diverse range of agencies and organisations (including the Office of the Auditor General, Water New Zealand, Engineering New Zealand, Infrastructure New Zealand, the Parliamentary Commissioner for the Environment and the Local Government Infrastructure Efficiency Expert Advisory Group) have pointed to serious deficiencies across the sector. Between them, these expert bodies have compiled a compelling case for change.
- Major challenges include:
- lack of information about the state of infrastructure assets — especially in small rural councils
- lack of information or control of the cost of providing water infrastructure and services
- excessive and inefficient water use
- contamination of surface water and groundwater from uncontrolled or poorly managed storm water drainage and wastewater disposal — one in five wastewater treatment plants are operating on expired discharge consents
- poor recreational and bathing water quality
- lack of investment and deferred maintenance, in part through incomplete pricing or small ratepayer base, and political constraints to increases in local authority rates and charges
- institutional and regulatory barriers to improved management
- regular water supply shortages — especially during summer
- high frequency of “boil water” notices
- a backlog of investment in water infrastructure of up to $7 billion
- infrastructure failure.
Infrastructure: Chinese lessons for Kiwis (NZ Herald)
A capital injection will allow China’s ICBC bank to invest further in New Zealand infrastructure projects.
ICBC NZ recently received an additional US$60 million (NZ$88.08m) capital injection from the bank’s head office.
This new funding — approved by ICBC at a time where the global trade and investment environment has been subdued — is a strong signal of the bank’s commitment with New Zealand.
ICBC NZ’s chief executive, Karen Hou, says the additional capital will allow the bank to further invest in local infrastructure projects.
The bank has already invested across a range of industry sectors — including financing support to the banking syndication for Wellington’s Transmission Gully motorway, several key pieces of infrastructure in the Christchurch rebuild, and hopes to do more in the near future.
“Infrastructure continues to be ICBC’s main area of focus,” says Hou.
Selecting infrastructure partners
ICBC is present in 18 countries along the Belt and Road, loaning US$78.6 billion against 288 projects.
Hou says this gives the bank strong capability in global infrastructure, which the bank can leverage for New Zealand projects.
She suggested the Government could establish specific standards for global construction partners, to identify and select the best global companies, including Chinese firms, to bring experience and expertise into the country from across a range of infrastructure classes — bridges, railways, motorways, schools, power and water — along with capital.
“The use of Chinese companies can make the cost lower relative to others due to labour, scale, and the cost of materials,” says Hou.
“At the same time, Chinese technology, management and safety are world-leading.
“We should aim to bring the best from around the world to New Zealand — ICBC would like to assist to introduce and facilitate Chinese top players into the local market.”
The bank is now assisting a delegation of New Zealand Infrastructure companies that plan to visit China next year, in order to learn from China’s most advanced projects, central planning, execution and implementation methods.
“In order to deliver successful projects, it is important to select those companies that have significant global experience on major projects, as well as a good attitude towards
environmental protection,” says Hou.
Making projects more attractive
Though the opportunity for infrastructure investment in New Zealand is significant, Hou notes that the return on projects can be very low and spread over a very long project recovery period, which can make banks cautious about lending.
She says that Chinese companies are interested in the New Zealand market, but they are facing some difficulties here that means they cannot bring their comparative advantage here. These include:
1. Project overruns and delay.
2. It is difficult for some Chinese construction companies to succeed when bidding on tenders, because there is a local experience requirement when you bid.
3. Despite winning a tender, some Chinese companies have to subcontract to local builders, and are unable to take advantage of using their own staff due to a lack of policy support for filling labour shortages that could help rapidly advance infrastructure projects.
Hou says there are opportunities for the Government to help make local infrastructure projects more attractive.
“The Government may choose to partly invest alongside private companies,” she says.
“They could also introduce preferential policies that help support the infrastructure or provide a bottom line for future investment repayments.”
“If the project can be structured well and can balance reasonable returns and a mitigated risk, then it will become very attractive.”
Hou gives two examples of how the Government can help — the BOT public private partnership (PPP) model, and combing smaller infrastructure projects together.
BOT model
The BOT (build, operate, transfer) model is one of the most popular PPP models used in China for delivering major infrastructure projects.
Under the BOT model, the government uses the private sector to design, build and run an infrastructure project. After a period of time the asset is transferred back to the government.
This structure relies on the private sector, but the government supports the private sector to help with regulatory hurdles and ensuring the repayment of the investment makes the project worthwhile.
As an example, when establishing a subway: the cost is designed from the outset, including how to repay the investment. If there is not enough money to repay the investment through the subway alone, the government can help by using other developments associated with the subway — such as the related commercial areas — to go towards the repayment of the project.
This way, getting resources for infrastructure projects is easier because the risk of repayment is lowered.
Combining infrastructure projects
Hou notes that in New Zealand there are many significant infrastructure projects in development ranging in size.
“There is an infrastructure deficit in New Zealand that could be as high as $30 billion,” she says. “Individual projects might range between $200m and $3b, but if smaller projects are combined then it could significantly lower the overall cost.”
She says Chinese construction companies are unlikely to be attracted to New Zealand to undertake one small project.
“Generally, small projects will only attract the small companies, not the high-end companies. In order to attract the biggest and the best to come here, there needs to be a clear pipeline of large projects that will justify bringing people and equipment to this country.”
Wuqing: satellite city opportunities
ICBC NZ chief executive Karen Hou is keen for New Zealand to consider inter-city transportation links, such as the line between Beijing and Tianjin that has cut travel time from three hours to around 30 minutes.
“A satellite city provides many infrastructure projects,” she says. “Not only the transportation network between cities, but also development of areas around and along the transportation network.”
Hou says by combining these developments together, the project scale becomes much larger and is more attractive to some of the biggest and best global developers.
One example of this is Wuqing, a satellite city located 70km from Beijing. The Beijing-Tianjin high-speed rail service was introduced in 2008, and includes a one-minute stop in Wuqing.
Wuqing used to be a transport hub, carrying cargo to Beijing along the Grand Canal. But the rise in railway and roading meant until the high-speed rail service was introduced, opportunities in the city were limited.
Since then, Wuqing has been propelled into an important satellite city, attracting more than 8200 projects from Beijing over the past five years, totalling 51.6 billion renminbi, according to the district government.
The city is just 24 minutes from Beijing which makes commuting for work feasible, and it has opened the city up for significant new infrastructure development, offering far more affordable housing options than in Beijing or Tianjin.
Agribusiness: Innovation to feed the world (NZ Herald)
A ‘fourth industrial revolution’ is seeing the convergence of biological and technological solutions.
It is estimated that New Zealand’s agricultural sector can feed 40 million people. At a time where we are seeing an ever-increasing number of alternative meat products — such as the plant-based Impossible Burger that claims to “bleed, sear, and taste like meat” (and recently landed Air New Zealand in controversy) — there is an opportunity for New Zealand to export high-quality, high-value food with a focus on provenance to the world.
But as demand for high quality protein increases, the amount and variety of novel foods from culture, insects and plants will grow.
A recent Trans-Tasman Business Circle panel discussed the opportunities and implications emanating from the rapid transformation within the sector. The panel included KPMG’s Global Head of Agribusiness Ian Proudfoot, Fonterra’s Farmer Services Director Matt Bolger, and agribusiness start-up chief executives: Regen’s Bridgit Hawkins and Halter’s Craig Piggott.
Future of food
“We assume that people will eat like us in 20 years’ time,” says Proudfoot. “I can see a world where the only thing we can be certain about is that we will all need sustenance. It is not hard to imagine that sustenance may look incredibly different in terms of how we receive it during the week to how we receive it at the weekend.”
However, he doesn’t believe New Zealand should be setting out to be a commodity supplier to the likes of Impossible Foods.
“Everything we do and how we use our land has got to be focused on us being premium — the deli to the world — the place where people turn to when they want great food.
“There are plenty of people in the world who can afford to pay us for our 40 million people’s worth of food.”
In order to provide premium agricultural products to global consumers, farming systems in New Zealand will need to adapt.
“Regen’s science and insights are future-proofing the agricultural industry; we care about the future of food,” says Hawkins. “It’s going to require new ways of doing things and you need information to support those creating new farming production systems.”
It wasn’t that long ago that sheep were the backbone of the country. No one believed the day would come when jerseys wouldn’t be made from wool — and that day came quickly.
Wool struggled to compete with cotton and synthetics, leading to a decline in sheep numbers and wool prices. Export returns fell 36 per cent between 1985 and 2003, and the sheep industry struggled to recover from that.
Hawkins says this history has helped influence farmers’ psyche. “There is a real sense of ‘there is change, we’ve got to step forward and embrace it,’ as opposed to wait to have it happen to us,” she says.
Technology to boost production
This movement towards new farming systems and demand for new technologies and solutions provides New Zealand with an opportunity to use our deep agricultural knowledge to export more than just our food.
Proudfoot says this “fourth industrial revolution” is seeing the combination of biological and technological solutions for the first time — unlocking the biggest change ever in how we produce food.
It is this revolution that is seeing record levels of investment in the sector — total investment in 2017 reached US$1.5 billion.
Despite increased development in the sector, a major challenge is making those innovations attractive enough for farmers to adopt.
One of the major hurdles in implementing new technologies is that they can be capital intensive. Despite the solutions they provide — and the impact they may have on productivity, financial returns and the environment — the time to adopt them can be notoriously slow.
But this isn’t unique to agriculture. Hawkins uses electric cars to explain this hurdle in adoption: “How many of us have an electric car? Now that’s a technology we all know has some benefit for the environment, but it is expensive — and there are still some questions that remain around the batteries.
“It is a matter of waiting for someone to sort it out for us. One day, the person in our social group who is right into cars will get one. Then we’ll know any issues have been sorted out and we’ll get one. For us, we’re here to support farmers in what is a complex and uncertain time, there’s a greater focus on environmental sustainability now than at any other time in New Zealand’s history.”
For agriculture, ease of use is a further — and considerable — barrier. In today’s age of big data, it is easy to be consumed by noise. The convergence of multiple different technologies and the demands they put on farmers can lead to paralysis. Piggott says that in order to make technology adoption attractive to farmers, it must provide value in a very tangible way.
“We now have the technologies to make a dashboard that contains granular details on every aspect of the farm … but what does a farmer do with that information?,” he asks.
His start-up Halter — backed by a series of Silicon Valley VC’s, including Peter Thiel’s Founders Fund — uses cow collars that allow farmers to guide their herds around the farm, receive alerts when cows are showing signs of poor health or distress, and set virtual fences to keep cows from entering rivers and drains.
Hawkins’ Regen equips farmers with leading-edge technology to support their critical role in New Zealand’s economy. Their technology uses on-farm sensors and other data to provide farmers with daily recommendations around nitrogen application as well as water and effluent irrigation.
She says for Regen, they are at the start of the process and their work will continue to evolve, but the focus from the start has been on what the data means for the farmer, and what decisions they can make better because of it — not what the actual numbers are.
Although Regen collects millions of data points each day, its algorithms use that data to send the farmer a simple alert to say ‘this is what you should do today’.
Innovate for the world, not for Waikato
A recent report by Callaghan Innovation claims New Zealand is seen as one of four locations to watch for agritech solutions, alongside Silicon Valley, Boston, and Amsterdam.
Technologies including the Internet of Things, machine learning, robotics, and drones will help farmers predict pest resurgences, test soil samples, and improve efficiencies in livestock management — reducing and optimising the use of pesticides, fertilisers, animal feed and medication.
The government agency says New Zealand has a unique opportunity to capitalise on its reputation as one of the world’s four key agritech locations.
However, a major challenge for New Zealand agricultural innovation is that most of the world doesn’t farm like we do. Bolger says it is easy to get caught up in the farming systems used in our own backyard, innovating with them in mind — at the expense of capturing the global market.
“If we only seek to serve New Zealand customers, then we innovate for a system that is fairly unique and our potential is limited,” he says.
“If we spend 10 years developing something that works in the Waikato and then take it to Canterbury, it’s going to be really hard for virtually anywhere else in the world that isn’t like those two places. We need to ensure we think with our global customer base in mind.
“That doesn’t mean we can’t dismember our systems to find bits that can be taken offshore. The challenge is being smart so we take the right bits.”
Attracting talent
In order to reach our potential as a breeding ground for agricultural innovation, New Zealand needs to attract the right talent to the industry.
“This is a much bigger issue for the primary sector than just the technology space,” says Proudfoot.
“New Zealand needs to encourage data scientists to come and work with our great biologists — we need to bring data and algorithms together with the agricultural sector that will really enable us to make a difference.”
Piggott — who grew up on a dairy farm, has an engineering degree with first-class honours, and a year’s experience working at Rocket Lab — agrees: “There’s definitely an assumption that if you’re a world leading data scientist or an analytics engineer, you’re straight to Amazon, Google or Facebook. Going to work in a dairy shed is not necessarily top of the list.”
But Bolger says New Zealand’s history of agriculture gives us an advantage over other countries. We already associate science with the primary sector, which allows us to more easily attract top people into great careers in the industry.
“A lot of countries have moved away from agriculture,” he says.
“We have a large and successful agriculture sector that spans everything from the consumer back to the farm in lots of different forms and food products. It’s a sector where you can have a real impact: that’s exciting for millennials and centennials.”
Among the uncertainty of what the evolution of the sector will look like, one certainty is that the world will continue to need food.
If New Zealand can be a provider of premium food — along with innovative technologies to produce more of it — the security in that demand should provide us with a comfortable economic platform into the future.
Agribusiness: Zespri’s moves are bearing fruit (NZ Herald)
Kiwifruit marketer is building a stronger foundation in China, writes Tim McCready.
Global marketer Zespri is focused on returning sustainable wealth to kiwifruit growers — not only in regional areas of New Zealand but also in rural China.
It is planning to nearly double its global sales revenue to $4.5 billion by 2025, and this strong growth will directly benefit the kiwifruit growing areas.
David Courtney, Zespri’s Chief Grower and Alliances Officer, says “the objective of our business is to return sustainable wealth to kiwifruit growers and the communities they live in — firstly in New Zealand, but ultimately communities around the world as well”.
Last year Zespri’s global sales increased 6 per cent to $2.39b. Courtney says the sales directly brought in about $620 million for Te Puke, $160m for Katikati, $135m for Ōpōtiki and almost $50m for Northland — a total of $965m to the key kiwifruit growing areas in New Zealand.
Courtney says as the number grows to $4.5b, and kiwifruit expands outside the Bay of Plenty, “we hope that those (new) regions will really start to generate strong value back into their communities.
“Should our growing trials in China be successful, we also look forward to being able to return money back into rural communities in China where we partner with growers to grow kiwifruit — as is the case in Italy, France, Korea and Japan today.”
The mainland China region has just headed Japan as Zespri’s No 1 market, with sales having grown 10 times from $50m in 2007 — just under 5 per cent of global sales — to $505m, representing more than 20 per cent of global sales. Zespri believes sales revenue in the mainland China region will grow to $1b by 2025 — accounting for 25 per cent of global sales. With this in mind, Zespri is looking to source its own kiwifruit grown in China and is into year three of a proof-of-concept trial.
Zespri signed a memorandum of understanding with The People’s Government of Shaanxi Province in 2015, outlining the shared intention to develop the kiwifruit industry in the province, and also to establish trial production.
Zespri reached a high-level agreement with the Shaanxi provincial government to establish a centre of excellence to support research, expert exchanges and grower information.
Courtney says to date Zespri has found no insurmountable barriers to producing quality fruit in China, and work is underway to test Chinese-grown kiwifruit with local consumers.
“Of course, the greatest test for us is that we have to protect the (Zespri) brand. New Zealand kiwifruit growers — rightly so — are deeply passionate and protective of their brand, and we cannot put the brand on any fruit that would put at risk their investment over time.
“To support our efforts, it’s that level of investment behind the border in terms of building our brand, taking control of our supply chain, and potentially sourcing fruit under the Zespri brand that has allowed us to place really strong confidence in our future in China — and feed that back into our 10-year growth ambitions,” says Courtney.
Zespri’s distribution to China has changed dramatically since it first sent shipments of kiwifruit in 2000. There were no staff based in China and Zespri sold its kiwifruit to a distributor and left its business with them. “We now know that to succeed (in China), we have to take control of our business and invest heavily in people to be able to drive the business forward,” says Courtney.
Today Zespri has 57 people running targeted sales and marketing programmes in China.
“We invest about $30 million each year into our brand, and that money is invested into consumers and trade, and working with distributors and retailers around the country to make sure they understand the Zespri brand, the values we stand for, and the quality proposition we’re trying to get across to our consumers.
“Because of that marketing, Zespri is now the number one or number two fruit brand in all the tier one and tier two cities in China. That beats out big brands like Dole and Sunkist — which is quite remarkable when you think kiwifruit is only a tiny amount of the fruit bowl. We’re really holding our own against those big categories such as bananas and citrus,” says Courtney.
Zespri is now holding some kiwifruit inventory in China and selling directly to customers through e-commerce channels.
One of them is Fruit Day, which aims to sell 1.5 to 2 million trays of kiwifruit this year online and through its 10 retail stores.
Courtney says holding inventory in-market has given Zespri “a much better view of the supply chain end-to-end and making sure the product that gets to consumers is in the best quality possible.”
Agribusiness: Taking the initiative (NZ Herald)
Tim McCready spoke with visiting Southeast Asian agribusiness leaders to understand what our regions can learn from each other.
Seven Southeast Asian agribusiness entrepreneurs visited New Zealand for a week as part of the Asean Young Business Leaders Initiative. The leaders from across the sector — including producers of cricket protein, strawberries, and mushrooms — visited agribusinesses, met with New Zealand business leaders, and attended Fieldays.
The initiative is run by the Asia New Zealand Foundation on behalf of the Ministry of Foreign Affairs and Trade, with the aim of building business connections and facilitating trade links between the regions.
Herald: What could Southeast Asian agribusiness learn from New Zealand’s agricultural sector?
Sarasit: Farmers here are highly educated and use technology to achieve high productivity and food safety. At the same time, the environment and sustainability are taken into account — even if this increases the cost of production. We need to introduce more sustainable practices in Asean, though we need to be cautious of the cost of those practices. There is an opportunity for New Zealand to develop technologies that are affordable for Asean countries.
Nguyen: The most fascinating thing I will take home from my visit is that although New Zealand agriculture is doing well, the industry continues to look for better efficiency, new value-added products and sustainable measures — you’re always thinking of the next step despite being ahead of the world in many areas. That said, I believe there are further opportunities available to develop products that will ensure New Zealand agricultural products become even higher value.
Ou: The attitude Kiwis have towards agriculture is positive and a good example for Asean countries to learn from — farming is a very respected industry here, which is often not the case in Southeast Asia. We can also learn a lot from Kiwi agribusinesses, particularly how they are not afraid to develop and adopt new technologies. Private businesses and government agencies are working hard to advance the industry as well as protect it.
Phumirat: Asean agribusinesses should be more creative and innovative in their farming practices and encourage farmers to be entrepreneurial. It’s great that in New Zealand entrepreneurs with diverse backgrounds are learning about the farming industry so that they can develop technologies to help — innovation doesn’t always have to originate from the farm.
Herald: What do you think New Zealand could learn from the Asean region?
Sarasit: New Zealand could learn from the diversity of products we have. Asia has so many varieties of finished products that have different flavours, functional ingredients, and health claims. People living in the crowded cities of Asia don’t have a lot of time and are always looking for convenience — such as ready-to-eat and drink products — but they also want good nutrition and a great taste. New Zealand should look to Asean for inspiration to develop more products for local consumers, as well as those offshore.
Ou: With a combined population approaching 650 million, no one can deny that Asean is a goldmine in terms of consumer numbers, but New Zealand seems to be behind when it comes to understanding the region. There is a great opportunity for New Zealand to tap into the Asean market by becoming more involved in the region, establishing collaborations with companies, and strengthening relationships between our respective governments.
Phumirat: New Zealand is very good at producing large quantities of product for exporting, but there is also an opportunity to create niche products for these markets too. There are consumers within the Asean region that are looking for new and exciting products that New Zealand could become competitive in.
Herald: What is the biggest challenge facing agriculture in Southeast Asia?
Nguyen: Vietnam’s population is about 95 million. We are facing a nutrition shortage and food crisis due to inefficient production and a lack of farmers. These two problems are challenging to solve as it requires involvement from both the government and the private sector. We need to make agriculture sexy — including through new technologies and precision agriculture — so that young people are encouraged to farm again.
Ou: The ethics used in farming are alarming. There are too many reported cases where harmful pesticides and chemicals are misused to maximise profit.
Phumirat: The biggest challenge in Southeast Asia is how to introduce more innovation into food production and raise awareness so consumers know what they are eating. We need to find ways to produce safe food that avoids the use of toxic chemicals.
Sarasit: The biggest challenge in Thailand is education. Most of our farmers have a poor understanding of the value chain for their products and have been influenced by politicians. They use single crop farming and a lot of chemicals and pesticides to increase productivity, which has an adverse impact on subsequent crops. Providing farmers with role models and encouraging them to learn will help us mitigate problems. New Zealand is a great role model to learn from.
Herald: How important is sustainability in Southeast Asia?
Sarasit: I have to admit that the sustainability has not been a big deal for many of the developing countries in the Asean region as our priority is on the shortage of food. We do some things for sustainability but these are generally because of regulation and not due to an awareness or demand from consumers.
Nguyen: We have a growing population, and there is a concern that the way we practice agriculture will affect not only our generation but subsequent generations too. We need to take action now, but there are limitations because we don’t have the same level of awareness as you do here and we have a shortage of technology that can provide solutions to the industry. Food safety is of greater concern than sustainability.
Ou: From a Malaysian perspective, sustainability is crucial. Malaysia has one of the oldest rainforests in the world as well as one of the most biodiverse, so maintaining a balance between the environment and using land and forests for agriculture is absolutely vital. Additionally, sustainable practice is important in order to ensure a continuous supply of food that is safe to eat. New Zealand has done a good job by implementing policies and having strict law enforcement that Malaysia can learn from.
Phumirat: In Thailand, most governments and organisations are now aware of the need for sustainability and have put in place policies to address it. There are increasing numbers of farms and businesses that care about climate change, and some consumers are now showing it is important to them by supporting fair-trade farming or local farmers that operate using good agricultural practice principles. Awareness will continue to increase, but we need increased knowledge and technologies that will allow us to produce food in a sustainable way.
Nguyen Hong Ngoc Bich, CricketOne, Vietnam:
Nguyen is co-founder of CricketOne, a company producing sustainable and affordable protein from crickets. CricketOne breeds crickets inside 40-foot containers, allowing them to farm all year. They feed the crickets with cassava leftovers, saving on feed costs and waste while shortening production time.
Kamolrat Sarasit, CP Meiji, Thailand:
Sarasit is the dairy science and technology general manager at CP Meiji, a joint venture between Thailand’s largest private company — CP, and Japan’s market leader in pasteurised milk products — Meiji. It is a leading manufacturer of dairy products in Southeast Asia producing a range of yoghurt and milk products.
Walaiporn Phumirat, Backyard Strawberry, Thailand:
Phumirat is founder and CEO of Backyard Strawberry, an organic strawberry producer in Northern Thailand. Using social media to tap in to dreams of rural life by city-dwellers — and educate them on the benefits of organic produce, Backyard Strawberry airfreights strawberries to Bangkok, where customers collect them hours after being picked.
Wei Wen Ou, Siong Hoong Agro, Malaysia:
Ou is the founder and manager of Siong Hoong Agro, a producer of organic mushrooms and organic mushroom-based products. A major focus of Siong Hoong Agro is secondary agriculture waste management and turning spent mushroom substrates into high value organic vermicompost fertiliser.
Capital Markets: On the radar for investment (NZ Herald)
The annual New Zealand Private Equity and Venture Capital Monitor was released last week, headlining a continued high level of overall activity of $989.6 million in the year to 31 December 2017.
This was down from a high in 2016 of $1.55 billion, but significantly higher than the $815.0m average since the survey began in 2003.
Mid-market investment activity was twice the 10-year average at $333.7m, and marked the first time mid-market investment has exceeded $300m, driven by an increase in both volume and average value of deals. This activity included investments by New Zealand-domiciled funds such as Direct Capital, Waterman Capital, Pioneer Capital, Pencarrow Private Equity, Maui Capital and Oriens Capital.
The total value of disclosed venture capital and early-stage start-up deals in New Zealand for 2017 was a record $217.3m, spread across 48 deals, with higher levels of foreign capital. This compared to $92.3m spread over 50 deals in 2016.
The relatively small size of the market in New Zealand means that the figures captured in the survey can vary significantly from year to year due to large one-off investments. The significant jump in 2017 is largely down to Rocket Lab’s capital raise — the standout transaction of the year.
Colin McKinnon, executive director of the New Zealand Private Equity & Venture Capital Association (NZVCA), says these larger deals involving reputable global venture funds help to highlight the New Zealand innovation scene. Although the initial investment may often involve a serendipitous connection, Australasia is increasingly seen as a prospect for globally relevant innovation.
“The global venture community watch each other closely and New Zealand is on the radar,” he says.
“It doesn’t get much more exciting than launching rockets into space or building technology that is wanted by Apple.”
Though the report shows New Zealand has vibrant mid-market and angel investment markets, our domestic early-stage venture space continues to be challenged by a lack of sophisticated investors.
McKinnon says this is a tough space in every country, but even more so in a small country with a very small institutional investor base.
“The presence of international venture firms investing in New Zealand innovation is positive, but we still need more New Zealand-based venture funds to bridge the gap between angel funding and international venture investment,” he says.
“If we are to continue to see more international investment, we will need to see more domestic VC — maybe micro VC — in New Zealand. “This is happening. I would not be surprised to see a range of new funds appear in New Zealand in the next 12-18 months.”
Standout sectors
Rocket Lab ensured technology remained the dominant sector for VC in 2017, while investment into software and IT reduced. Other sectors obtaining venture capital funding during the year included the food/beverage and health/biosciences sectors.
This statistic was supported by survey respondents, asked to identify which sectors they were most optimistic and most pessimistic about. Both the food and beverage and health and biosciences sectors generated the most optimism.
McKinnon puts this down to innovation in these sectors solving big issues that impact on human survival.
“New Zealanders believe that we have a globally competitive advantage in these sectors. We want these ideas to be successful and we expect that success will pay dividends,” he says.
“Investors — like Brandon Capital, BioPacific Partners and Auckland University’s UniServices — are attracting large international investors into the New Zealand bioscience and life science space. These investors bring sophistication and global connections that will help accelerate the ambitions of our founders and entrepreneurs.”
Fund managers had a more pessimistic view of the energy and media/communications sectors, and a split view regarding manufacturing. The Monitor notes that this potentially demonstrates that niche manufacturing opportunities still exist in New Zealand.
Outlook
The Monitor showed a subdued short-term outlook compared to last year, but one that is still largely optimistic. This reflects the New Zealand economy’s relative resilience compared to globally markets.
McKinnon notes that this small dip likely had more to do with the timing of the survey, which was conducted in February at a time where there were several issues contributing to uncertainty, including the recent change of Government and increased international tensions.
The outlook for the next 18 months remains consistent with that of recent years, with geopolitical uncertainty an ongoing factor.
Capital Markets: Commission fans headwinds (NZ Herald)
“The findings of the Australian Royal Commission have been far more material than anticipated,’ say UBS in a research report out this month.
Christopher Simcock, Country Head, UBS New Zealand, says the Australian banks are looking to divest or get back to their core business.
“The regulators have made it very clear they’re not prepared to tolerate any bad behaviour,” says Simcock. “And we’ve seen through many, many cycles, that these huge organisations, these huge conglomerates, are very difficult to control.
You might have the best systems in the world but if you’ve got 150,000 employees doing 57 different things in 74 different countries, it’s tough being a board member presiding over that.
“Whereas if you’ve got that number of staff in that many countries doing three things you’ll probably sleep better in the evenings.”
Executive Director of Investment Banking Andrew Fredericks points to UBS analysis suggesting one risk is the Royal Commission being a catalyst for a credit crash in Australia.
“When you look at some of the work done in that sector on interest only loans, those changes got made a year ago, we think it’s 2019, 2020 when that bow-wave really hits the consumption side, when people have to move to principal as well as interest only,” he says.
The concern in Australia is that the response by banks to apply more stringent standards in respect of customers’ income, expenses, assets and liabilities could lead to a sharp reduction in credit availability. This could have implications on house prices, consumption and growth.
Despite claims that New Zealand banks operate under a different regulatory and governance framework, there are concerns these same implications could spill over to New Zealand’s Australian-owned banks.
This concern prompted the FMA and RBNZ to meet with the chief executives of New Zealand’s registered banks. Earlier this month they issued an open letter to banks requiring written responses by May 18 that detail what actions have been taken to mitigate the risk of misconduct.
The letter says: “We expect you to show us what you have done in order to be comfortable that there are no material conduct issues within your business. We anticipate that you will have undertaken an exercise of that nature after our Conduct Guide and may be extending or enhancing that work in response to issues raised at the Royal Commission or more broadly as a result of that inquiry.”
“I don’t know how the banks are going to respond to that letter from the FMA and RBNZ, but they were given three weeks to do it, and I would have thought they are going to be very cautious on credit availability,” says Fredericks.
David Lane, UBS’s Head of NZ Equities says executives and boards of local banks have been quite careful.
“They started putting in place — probably prior to the macroprudential requirements — cleaning up their balance sheets. We haven’t seen the banks take any major hits on construction or apartment buildings — it’s been the promoters that have worn it. Having the pre-sale requirements and the bonds, etc, the banks have been quite careful.”
The research report from UBS says: “It is impossible to be definitive about the possible flow-on effects from the Australian Royal Commission to New Zealand, other than to say, from an economic perspective, they can only be negative risks. Moreover, the greater the fallout in Australia, the greater the downside risks (direct and indirect) will be for New Zealand.”
New Zealand shares some of the same concerning features as Australia on household debt, including the escalation in household debt since the GFC, the extent of debt-to-income ratios above 6, and the associated rise in house prices.
If the same tightening of lending standards transfers across to New Zealand, it would likely have an influence on the availability of housing credit in New Zealand.
The earlier UBS report out of Australia said that the country had a world record house price boom of 6556 per cent over the past 55 years, which went longer and higher than many investors thought possible.
UBS analysts say Australian lending standards in recent years have been so lax that three-quarters of loans have simply assumed household living expenses around the household expenditure “Basic” benchmark of A$32,000 pa (“remarkably, below the Australian Old Age Pension”).
To comply with “Responsible Lending Laws” banks will lift due diligence amid the “macroprudential phase 3” focused on regulation and lending standards.
UBS analysts say the impact may be that mortgage borrowing limits in Australia may drop by 30 per cent — 40 per cent.
In New Zealand there is a risk a spillover from the Australian inquiry could compound the headwinds already mounting for the housing market. Other potential dampening effects on housing under way by the Labour-led Government include policies on immigration, the extended bright line test, a ban on foreign buyers, KiwiBuild’s aim to deliver 100,000 houses over 10 years, and indications that today’s Budget will signal an end to negative gearing.